McDonald's Stock Not on Value Menu Amid Weak Sales

By

Dimitra DeFotis

March 10, 2014

Order Reprints

Print Article

Text size

Subpar sales were on the menu again in February for long-struggling McDonald's.

Same-store sales fell 0.3% in February. A 1.4% decrease in the United States and a 2.6% decline in the Asia/Middle East/Africa region were especially troubling. In the U.S., severe winter weather was a factor. In Asia, the company blamed weakness in Japan, a shift in the timing of the Chinese New Year and negative results in Australia.

Still, aside from strength in the U.K. and France, McDonald's remains unable to improve operations and its menu while maintaining low prices. And that's likely to continue. "…Our relatively flat year-to-date global comparable sales will pressure margins in the first quarter," said McDonald's Chief Financial Officer Pete Bensen in a press release.

McDonald's same-store sales have disappointed for more than a year. And since October, U.S. same-store-sales growth has been about three percentage points below that of its peers, which is "especially troublesome," note John Ivankoe and Amod Gautam of JPMorgan.

Breakfast is a big challenge for McDonald's as it derives about 25% of its sales from it compared to 15% for other fast-food competitors, JPMorgan estimates. Because many of McDonald's customers grab coffee and a bite on the way to work, a high jobless rate continues to take a toll. McDonald's is tinkering with extended breakfast-menu hours, which could include all-day breakfast.

But the issues run deeper. McDonald's has much to turn around if it wants to be more relevant to the influential "millennial" consumer – a cohort of more than 60 million people between the ages of 18 and 35 – who don't rank the Golden Arches among their top eating establishments. The McWrap sandwich was designed to attract young eaters, who demand more customization and variety, according to an internal memo obtained by Advertising Age last year.

Giving the customer what he or she wants isn't novel, but it's a big shift for McDonald's to "force operations to fit demand as opposed to leading with operations and expecting consumers to mold to the offerings," write Ivankoe and Gautam.

Granted, McDonald's owns plenty of real estate worldwide, and if it attempts to monetize any of that property, that could boost shares.

But given the company's declining same-store-sales trends, shares look fairly valued at about 16 times estimated-2014 earnings of $5.83 per share.

Investors would do well to curb their appetite for the stock despite its enticing 3.4% dividend yield.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.